What’s the Difference Between a Plan, a Budget, and a Forecast?

Brian Martell 0

“Remind me what’s the difference between the plan and the forecast?” is something we often hear from executives looking for clarity.  While a company’s plan, budget, and financial forecast are often discussed in the boardroom, these terms’ functions are not always clear. Finance leaders commonly use the three terms in conjunction with one another, allowing each model to inform the others. 

So, are they interchangeable? The short answer: no. In fact, financial forecasting, budgeting, and planning each serve a unique purpose. A plan serves as the foundation, a budget guides how to allocate cash, and a forecast projects the financial future of the business. CFOs understand that each is a standalone piece of the company’s financial puzzle.

Financial Planning: Explained

Generally, a financial “plan” aims to define the financial direction and vision of the organization within the context of a broader business plan. Leaders ask themselves how the business will stack up in the next 1, 5, or even 10 years. The “plan” answers that question by outlining the company’s operational and financial objectives. Executives build out teams and infrastructure based on this plan and the defined goals.  Colloquially, the “plan” is sometimes used interchangeably with the most recent budget or forecast, and can be broadly considered the budget or forecast that is the most likely “version of truth”

Benefits

Because of the long-term nature of a financial plan, it allows for more flexibility and creativity. In the case of a financial plan (versus a budget, for example), the means are less important than the end. Ultimately, a good financial plan provides a top-down operational framework to explore various scenarios.

Challenges

Because the future of an organization is undefined, financial planning is a perpetual process. Despite this, a plan is more static in nature—more of a roadmap than a document that’s updated daily. The plan also relies on historical performance data and subjective financial analysis, so it can never be fully accurate. 

Budgeting: Explained

Businesses, but most commonly, the Finance team, compiles a budget to determine how the company will spend its capital during the next period—a month, quarter, but typically a fiscal year. The budget’s primary goal is to determine what resources to allocate to each part of the company, from salaries to office supplies. The focus of a budget revolves around cash position, including expected revenues and expenses, to create specific financial goals for the foreseeable future. Most businesses create a budget annually and implement it from the start of the fiscal year.  The budget is also commonly considered “unmovable” and is used to gauge performance of actuals or forecast data versus the planned budget.

Benefits

A thorough budget offers clear guidance on how a company should be spending its resources by providing a line item for any expense imaginable. Budgets also create accountability for departmental spending because overages are apparent and gaps in appropriate funding become clear as the year unrolls. Teams should review the budget regularly and compare it with actuals, making each department responsible for any variances that occur. A budget aligns expectation with reality when it comes to revenue and expenses.

Challenges

Budgeting can be a difficult process to complete because of the kind of involvement it takes across departments, including meetings and negotiations with department leaders to determine the amount of cash they will need in order to accomplish business goals over the course of the budget. Since budgets are generally made to last an entire year, a budget might constrain necessary spending (or saving) if any unexpected situations in cash flow arise. Essentially, expense allowances are built so as not to exceed budget limits, while income projections are the minimum needed to make the budget balanced. Financial analysts need to calculate the variances between the two figures in order to evaluate the efficacy of the budget and the fiscal health of the organization.

Forecasting: Explained

A forecast is a financial snapshot of the future as it is best understood today.  When creating a forecast, teams need to examine possible financial outcomes based on the most up-to-date drivers and assumptions. The result is a view of how the business is trending so that the leaders can determine whether or not adjustments should be made to the existing budgets or plans.  

For example, the budget might assume that the business will hit a $10M revenue target, but the forecast shows that the business is on target to only achieve $8M.  Given the difference between the forecast and the budget, the business might adjust the variable costs associated with lower revenue, while simultaneously adjusting the expense plan in order to hit cash targets.

Benefits

A company’s financial forecast is updated regularly, such as monthly or quarterly. The forecast’s undefined nature allows it to be used for both short- and long-term projections and adapt to recent performance data. In this way, executives can make changes in real time, adjusting their operations, such as production, marketing approach, and staffing. 

Challenges

Forecasting can be a time consuming process that not all businesses are able to stay on top of regularly.  Because of this, many businesses update their forecast data periodically, such as quarterly or biannually.  It’s considered a best practice to build a rolling (ongoing) forecast so that these adjustments can be made in real-time.

Which is Most Effective for Me?

All three terms reflect expectations and estimates of financial objectives. Financial planning lays the foundation for budgeting, suggesting that a financial plan must precede the budget so that company leaders have an idea of what they are budgeting for. Meanwhile, a forecast projects how far over or under expectations a company may be.

A financial plan is a strategic, long-term tool, while a budget is tactical and short-term. A financial forecast is an updated reflection of the future. In a way, the forecast bridges the gap between the business plan and the budget. 

The most financially disciplined businesses leverage all three tools in their planning and operations. Financial modeling software like Cube can help companies build multiple plan scenario types, including budgets, forecasts, and even what ifs, in a way that allows leaders to visualize data, analyze past performance, and calculate how decisions may affect future goals.

Brian Martell

Brian is passionate about using technology to help finance professionals find better ways to do what they love doing. He has experience as an FP&A professional, an FP&A software implementation architect, and a product marketer.